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Severance Agreements

Using Severance Agreements:

A severance agreement is a contract between an employer and an employee. In most situations, the employee will be giving up his or her right to sue the employer and the employee will be provided additional compensation, benefits or other consideration for giving up this right. The employer and employee can agree on other issues as well such as covenants to not compete, confidentiality agreements and non-solicitation agreements. By signing the contract, both the employer and the employee demonstrate their intent to be bound by the terms of the agreement and resolve any disputes between them when agreeing to terminate the employment relationship.

An employee is not entitled to a severance agreement and an employer has no obligation to offer one in most cases. In some situations, a two week severance may be enough incentive for an employee to sign a release and give the employer an assurance that the employee will not sue the employer. When there are complicating factors in a termination, a release is worth something to the employer to resolve the matter. If the employee is in a protected class, has been out on leave such as FMLA or requested leave, filed a workers’ compensation claim or made some complaint against the company, then the employer may want to put closure to the situation with a severance agreement.

Severance agreements are an excellent way to resolve conflicts between an employer and employee when the employment relationship has deteriorated to the point that it needs to be terminated. Severance agreements can be used when there are reasons for terminating an employee other than for cause or documented poor performance, but can be used in almost any situation.

In situations where the employer has terminated the employee for cause and wants to fight an employee’s claim for unemployment benefits, a severance agreement would not generally be offered. Reasons an employee is terminated for cause and would not be entitled to unemployment compensation include, but are not limited to, stealing, lying, falsifying records, embezzlement, insubordination, fraud, committing a felony, disclosing private confidential information such as trade secrets, deliberately violating company policy or rules, or other serious misconduct related to the employee’s employment. In these situations, an employer would want to fight paying an employee’s unemployment and also would not want to pay a severance.

Another situation where a severance agreement may not be used is where the employee is a poor performer and being terminated for poor performance. An employer who has dealt properly with a poor performer should document the file so a severance is not needed. The employer should document that they have given the employee direct feedback about the areas of their job they are performing poorly, how to correct their behavior and directions on how to improve their performance. This should be documented or put in a performance improvement plan so that the file reflects the reasons for discipline and termination. If the employee doesn’t improve their performance or the situation gets disruptive to the workplace, the employer may have to terminate the employee.

However, many terminations may not be for cause or even poor performance and are still non-discriminatory and legitimate reasons for termination of an employee. Examples include losing the trust of the manager, not getting along with other employees or not being committed to the mission of the company. In situations where the reasons for termination can’t be objectively documented, it may be helpful to offer a severance agreement and obtain a release.

All terminations and discipline should be investigated and some sort of documentation should support the determination to discipline and terminate the employee. The documentation should make it clear that the employee has been terminated for legitimate reasons and not illegal or discriminatory reasons. If the employer documents its reasons for termination and can demonstrate that the termination or discipline is for non-discriminatory reasons and is not in retaliation for any protected conduct, then the employer has a good chance of defending against any claim that the employee might bring.

It is prudent to have an experienced employment attorney review the discipline and termination before it is implemented. Even the most prudent employer will have situations in which its management does not effectively document its discipline or termination and an employee files a complaint or a lawsuit regarding the termination. In those situations an employment attorney can review the file and advise the employer on ways to handle the situation and help negotiate a severance agreement so that costly and disruptive litigation can be avoided.

If your investigation documentation shows that an employee has committed some wrong and the employer has the evidence to establish this, an employer doesn’t want to set a precedent of paying off bad or disruptive employees. If the employee was terminated for cause such as insubordination or workplace violence or harassment, even if the employee was in a protected class or more likely to sue the employer, the employer should be prepared to defend against meritless claims.

An employer should review all terminations carefully and conduct its due diligence upfront so the matter can be resolved early. If the matter can’t be resolved, the file is well documented and an employment attorney can use this to defend the case and perhaps have the case decided on a summary judgment motion which can help the employer save thousands of dollars in attorneys’ fees.

A separation agreement is a contract and an employer can’t force an employee to sign a severance agreement. To be enforceable an employee must be given a reasonable amount of time to consider the agreement and should be given an opportunity to consult with an attorney before signing the agreement. To obtain an enforceable release of age discrimination claims under the Older Workers Benefit Protection (OWBPA), a terminated employee must receive 21 days to sign and consider a release. If the termination is part of an exit incentive program or other termination offered to a group or class of employees, regardless of whether the program is voluntary or involuntary, the employee must receive 45 days to review the release. In Minnesota to release claims under the Minnesota Human Rights Act, an employee must be given a 15-day revocation period unless the release is given in settlement of a claim filed with the Department of Human Rights or another administrative agency or judicial body.

Entering into a severance agreement can be the most cost-effective, least disruptive and prudent business decision that an employer can make. Since attorneys’ fees can be awarded in employment cases, it doesn’t make sense to pay an outside attorney to litigate these matters and end up also paying the employee’s attorney. A business employment attorney who works with your company on reviewing and drafting employment policies and procedures can guide you through discipline and termination issues and help you resolve these matters upfront before costly and disruptive litigation takes place.

You should contact an experienced employment attorney if you have questions regarding severance agreements. Contact Holden Law Firm and ask to speak to John Holden to discuss your employment law questions.

John C. Holden, Esq.
Holden Law Firm
5200 Willson Road, Suite 150
Edina, MN 55424
952-836-2640
John@holdenlawfirm.com
www.holdenlawfirm.com

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